What are ways that a country could shift its production possibilities curve to the

When the economy grows and all other things remain constant, we can produce more, so this will cause a shift in the production possibilities curve outward, or to the right.

Fresh Foods

Make or Buy Decision:

1. Make the ingredient in-house.

2. Make in-house is more cost effective by $3,000 ($90,000 - 87,000)

3. If 40% of the fixed overhead can be avoided if the ingredient is purchased externally:

Total cost:

To make in-house = $87,000

To buy = $78,000 ($60,000 + $30,000 x 60%)

To buy now becomes more cost effective by $9,000 ($87,000 - 78,000).

Explanation:

a) Management in production companies are always faced with the buy or make decision.  For this type of decision making, the appropriate costs to analyze are the differential (incremental) costs.  These are costs that make a difference between alternatives.

b) Calculation of cost:

                                                                  Make                  Buy

                                                        Total            Unit

Purchase                                                                              $60,000

Direct materials                           $25,000     $5.00

Direct labor                                     15,000       3.00

Variable manufacturing overhead  7,500        1.50

Variable marketing overhead         9,500        1.90

Fixed plant overhead                    30,000       6.00            30,000

Total                                             $87,000    $17.40         $90,000

Total variable costs                     $57,000                        $60,000